A financial exchange is a market, physical or electronic, in which shares, options, derivatives, futures, and other units of financial instruments are bought and sold. Financial instruments, for example, include equities, securities, stocks, options, bonds, commodities, indexes, exchange-traded funds, and other instruments.
A financial exchange matches bids to buy a particular financial instrument with offers to sell that particular financial instrument and tracks the price and volume at which a trade for the financial instrument can be executed. The introduction of electronic trading systems into such exchanges has enabled investors to place orders for financial instruments over a computer network and receive the status of orders in near real time. These trading systems also report prices at which financial instruments are quoted, bought, and sold to reporting entities that consolidate and disseminate trading information for various financial instruments.
Brokers represent clients in buying or selling financial products through a particular exchange, as well as in obtaining market information from the exchanges for clients regarding market activity. A transaction may be completed when one or more buy and sell orders can be matched with respect to price.
One advantage of such trading systems is that marketable orders generally can be executed immediately against available contra-side interests. An order is marketable when it is priced equal to or more aggressively than the contra side interest. For example, a buy order for a financial instrument is marketable when it is priced equal to or more aggressively than the current best offer for the financial instrument, and a sell order for a financial instrument is marketable when it is priced equal to or more aggressively than the current best bid for the financial instrument. In this context, more aggressive means higher for a bid to buy or lower for an offer to sell.
Lower levels of liquidity lead to greater bid-ask spreads, (e.g., spreads in prices between bids and offers) larger discrepancies between net asset value and the value of the underlying securities, and a decreased ability to trade profitably. It is preferable to reduce the difference in prices between the best bid to buy and the best offer to sell. Such a tighter market is better for market participants.
Various market centers (e.g., including exchanges, alternative trading systems, and crossing networks) offer investors the opportunity to participate in a scheduled auction process throughout the trading day. In an auction process, the price of a particular financial instrument offering is set after receiving all bids to buy and offers to sell and determining the highest price at which the total offering can be sold. In this type of auction, investors place a bid for a particular financial instrument they want to buy. The bid or buy order includes a desired quantity (e.g., number of shares) and a desired per unit price. Auction processes may include, for example, opening auctions, closing auctions, or intra-day auctions. Depending on the venue and the time of day, the auction may include different order types. Example order types include limit orders, market orders, auction-only orders, other orders, or any combination or limitation thereof.
Various market centers also offer investors the opportunity to trade securities during the trading day (intra-day trading) by placing one or more orders. Example order types for intra-day trading also include limit orders, market orders, auction-only orders, other orders, or any communication or limitation thereof.